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And The Apple Goes To …

By on July 27, 2015 in Apple Award
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Richard Morvillo recently penned this spot-on Law360 article titled “Devaluing the Currency of Settlements.”

In the article, the veteran lawyer asks whether white-collar settlement amounts have increased just because, opines that the DOJ and SEC have cheapened deterrence, raises questions about the lack of individual prosecutions and how this contributes to a facade of enforcement, and discusses how the role of defense counsel has morphed in regulatory investigations.

In pertinent part, Morvillo states:

“Now that the Arthur Andersen debacle is a distant memory, financial and other institutions are begrudgingly accepting guilty pleas and deferred prosecution agreements (“DPAs”). Penalties and fines in the hundreds of millions of dollars that must be borne by existing shareholders, many of whom were not stakeholders at the time of the alleged violations, are also more common. In addition, there is continuing concern within the defense bar that the DOJ is criminalizing conduct that historically was considered to be the grist of civil prosecutions. Similarly, the SEC now appears to be willing to bring more marginal cases as well as those involving “broken windows” and innocent mistakes.

Deterrence is a laudable goal for the DOJ and the SEC. But, despite the fact that generations of prosecutors have invoked “deterrence” as an excuse for being tougher than their immediate predecessors, there is scant evidence that increasing sanctions has had a marked impact on fraudulent and other misconduct. The sheer number of civil and criminal prosecutions brought over the last several years suggests that increasing penalties into the many tens of millions of dollars prior to that time did not forestall misconduct. If the converse were true, the government would not feel the need to ratchet up penalties.

Admittedly, vigorous enforcement, coupled with Dodd Frank, has contributed to enhanced internal controls and greater scrutiny by internal and outside auditors. These improvements began before the recent increase in sanctions and were driven in large part by companies’ self-interest in improving their culture and compliance regimes. Indeed, many institutions re-evaluate and strengthen controls and procedures, especially when they discover a whole or a lapse in existing functions, without waiting for the government to force such changes. Compliance has come a long way. Still, efforts to prevent and to detect misconduct have more to do with the desire for good corporate governance and avoiding future charges of misconduct than with the increasingly punitive size of sanctions the government has been handing out.

Criminal cases and daunting penalties are fodder for headlines, but they will not eliminate the root cause of serious misconduct — the behavior of a few individuals. For example, history teaches us that, though the DOJ and SEC have made insider trading an enforcement priority for years, there is no dearth in insider trading cases they bring year after year. Those willing to violate the law for personal aggrandizement or other reasons will find a way to do so. No compliance or control system can provide a failsafe against one or a few rogue misfeasors in a large company. Economic crime, fraud and other intentional misconduct will be with us so long as greed, arrogance, ego, poor judgment and other such traits are part of our human chemistry.

Criminal fines that are multiples of what they were in the not-too-distant past are now fairly commonplace, as are other forms of costly relief (e.g., compliance monitors). The same holds true for SEC Enforcement settlements, where tens, if not hundreds, of millions of dollars in penalties have been levied in settlements also requiring entities to disgorge large sums ostensibly reflecting the benefits attributable to the misconduct.

[…]

In other words, in raising the ceiling on settlements, the government is also raising the floor. What sufficed to settle a case only a few years ago is a far cry from the minimum sanction the government will demand today. Though, according to the government, the matters recently resolved criminally or at the high end of the sanctions range involved serious misconduct over a prolonged period of time by multiple actors, cases meeting that description are not new. The government said the same thing about its cases years ago after Enron and even before that following the revelations concerning Drexel Burnham and others. Today’s cases are not substantially different at their core from yesterday’s even while, in the interim, the government notched up the price of settlement several times.

[…]

It is rare for a regulated entity to litigate with its regulator, and the government knows that when it arrives at the negotiating table to discuss a resolution. Government prosecutors also count on the fact that companies are anxious to settle in order to get government investigations behind them. While most prosecutors try to be fair, they generally believe in their cases and demand terms the settling company finds inappropriately costly given its perception of the underlying conduct and available defenses. Company management values certainty and finality above all else, however, and often succumbs to the government’s demands simply to end an investigation. For these and other reasons, the government has the leverage to insist on sanctions that the company’s lawyers may not feel are warranted but at some point feel obliged to accept.

[T] he government’s policy of giving credit for cooperation has caused an evolution in the way cases are developed and settled despite the attendant costs. Over the past 10 years or so, the government has come to expect that entities will cooperate with it by identifying problems deserving scrutiny and delivering the facts the government needs to evaluate the conduct of the entity, its employees who were involved and those who supervised the actors. In an era of self-reporting and internal investigations, the traditional role of defense counsel has morphed often into the role of “fact finder” (for, among others, the government). The relationship between the corporate client and the inside and outside counsel is altered in these instances. For example, counsel conducting an internal investigation finds herself giving Upjohn warnings to employees in order to get facts not with which to defend the company but to share with the government. Where credit for cooperation is highest when approaching the government early and being forthright, a company generally wants to take advantage of the opportunity and set the tone for interactions to come. At the same time, having spent the money to investigate and to blow the whistle on itself, the company sets in motion a dynamic that favors a resolution, one in which cooperation should lead prosecutors to offer a more attractive package (albeit not as attractive as one available in the past). Although few defense lawyers and their clients believe that they are rewarded with benefits commensurate with their cooperation, most are not willing to risk the potential outcome of an investigation in which the company declines to cooperate.

The irony is that, while cooperation with the government is at an all-time high, so are the sanctions visited on cooperators. Because many government prosecutions, especially international cases where information is not always easily obtainable by U.S. authorities, resulted directly from extensive and costly cooperation, the government should ensure that corporations perceive that there is a clear benefit in sharing information. There are examples where the government has not brought certain charges or exempted a cooperator from the kind of monetary sanctions typical in cases involving similar misconduct. Yet, many lawyers find it difficult to explain to their clients why cooperation was worth it when the settlement they negotiated still wound up requiring exceedingly large penalties.

Finally, a more insidious problem that may arise from the devaluation of settlement currency is its potential negative impact on deterrence. As noted, deterrence and appropriate punishment for wrongdoers are important, and so is the stigma of being on the wrong end of such charges. A true criminal enterprise should be put out of business, and criminal prosecutions can help bring that about. Caution is necessary, however. Small companies and those in certain businesses, like investment advisers, are not likely to survive criminal or serious civil fraud charges or large penalties, and death is cruel and unusual punishment for their innocent employees who try to do the right thing. While larger entities are better able to withstand similar charges and hefty penalties (especially as the SEC is appropriately inclined to grant relief from the lifeblood-threatening collateral consequences of settlements), there is still cause for concern. Because we now live in an era where felony convictions of entities, DPAs containing punitive sanctions and huge civil penalties are part of the new norm, society will slowly learn to tolerate, if not become callous to, the emerging state of affairs.

The more cases there are with previously unthinkable sanctions, the more readily people will accept those sanctions as a normal cost of doing business. This cheapens the deterrence value of large penalties. The employee bent on violating the law will be dissuaded, if at all, by the threat of individual prosecution, not greater penalties for his employer. The increase in the nature and price of settlement will not alter the perception that companies can still buy their way out of trouble at their shareholders’ expense. That view has already taken hold — whereas Arthur Andersen did not survive after the charges against it, large institutions are now weathering the storm. The fact that institutions can accept responsibility for crimes and previously unheard of monetary penalties suggests that these settlements cause pain in the short term, but are not an effective deterrent in the long term.

Prosecutors understandably feel the need to be tough on intentional misconduct that harms the public. And they should be. At the same time, they should rely less on the “WOW” settlement factor and moderate their thirst for punitive sanctions whose efficacy as deterrence is questionable at best. Rather, they should focus on relief addressing the cause of the conduct and means of preventing it. The public benefits when companies, instead of paying for headline-grabbing fines, use funds to take remedial actions that increase the likelihood of preventing future misconduct.

However much the government claims it takes a company’s pre-settlement remedial actions into consideration, settling defendants are looking for more concrete evidence that their efforts pay dividends. The government should reward these companies more directly for their remedial actions; if penalties are nevertheless appropriate in particular cases, they should be kept in check and reflect, in quantitative terms, substantial offsets for voluntary improvements in internal controls and processes. That will still allow the government to insist that entities that have not taken needed corrective action expend funds adopting better governance procedures going forward.

There is also a perception among many in the defense bar that, while the penalty may vary, the same kind of costly ancillary relief is sought in certain types of cases whether or not the settling company took appropriate remedial steps. For example, compliance monitors and reviews are sometimes mandated in Foreign Corrupt Practices Act settlements notwithstanding the likelihood that their benefits are marginal where a settling entity took appropriate remedial steps before or during the government’s investigation. In recognition of pre-settlement steps, the government should propose more creative prophylactic relief that ensures adherence to newly improved policies. Reviewing and policing how a company handles them going forward are more apt to deter recidivism than redundant exercises or large fines. Thus, for example, the government might defer imposition of a penalty or other sanctions pending a company report on progress over a few years in the compliance area implicated by the settled charges; the sanctions could be triggered if defined compliance milestones are not met.

Government officials believe that they already adequately fashion resolutions in light of remedial actions taken by the settling defendant. Few in the private sector agree, however, and some think that the recent spate of increased sanctions demonstrates that the government has taken the opposite tack. We can hope that the government stops the seemingly never-ending escalation of sanctions and adopts a more measured approach focused on deterrence and not on headlines and out-sized penalties.”

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

And The Apples Go To …

By on November 26, 2014 in Apple Award, Layne Christensen, Obtain or Retain Business
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Often times there seems to be an echo chamber when it comes to Foreign Corrupt Practices Act reporting, commentary, etc.

One such occasion has been the recent Layne Christensen enforcement action (see here for the prior post).  The theme, which appears to have first been floated by lawyers representing Layne Christensen, but repeated by many others (see here and here for instance), is that the enforcement action was SEC only because of the company’s voluntary disclosure, cooperation and remedial actions.

That’s one narrative.

But some have bucked this narrative and have thankfully injected some informed thought into the conversation surrounding the Layne Christensen enforcement action.  And for this, the various individuals identified below receive FCPA Professor apple awards.

This other narrative is that the conduct alleged in the SEC’s enforcement action does not even violate the FCPA’s anti-bribery provisions.

This Shearman & Sterling Client publication, with former DOJ FCPA enforcement Philip Urofsky listed as the lead author, states:

“While a relatively unremarkable case at first glance, the SEC’s charges against Layne Christensen reflect a troubling approach by enforcement agencies to disregard the “business nexus element” of the FCPA’s anti-bribery provisions. These recent practices appear to contradict the Fifth Circuit’s opinion in United States v. Kay and create greater uncertainty as to the scope of the statute.”

[…]

Although a seemingly unremarkable case in a field known for blockbuster settlements, Layne Christensen illustrates a troubling practice by the SEC and US Department of Justice to disregard the “business nexus element” of the FCPA. Specifically, the FCPA states that to violate the anti-bribery provisions of the law, the defendant must pay a bribe “to assist the issuer in obtaining or retaining business . . . .” While it is often the case that bribes are paid on a quid pro quo basis in exchange for the award of valuable contracts, there are additional scenarios, like that seen in Layne Christensen, where the bribes merely assisted the defendant to improve its profit margins. In United States v. Kay, the Fifth Circuit held that bribes made in exchange for a reduction in tax liability or customs duties did not per se violate the statute without proof that the increased profits were used to obtain or retain some form of business.”

“Layne Christensen is further evidence that the DOJ’s and SEC’s current approach to the “business nexus element” of the FCPA flies in the face of Kay. By charging companies (often under extreme pressure to settle the case against them) with facts that do not show how the bribes were used to assist in obtaining or retaining business, the DOJ and SEC have created significant uncertainty as to the scope of the FCPA.”

[…]

“The SEC’s case against Layne Christensen demonstrates that the government continues to follow the practice … [of] treating the “business nexus requirement” as a seemingly unnecessary feature of the FCPA.”

[…]

“Strikingly, short of simply parroting the language of the statute, the SEC made no effort to allege facts as to what specific business was obtained or retained as a result of the reduced tax liability and customs duties. Such a pleading is clearly at odds with the Fifth Circuit’s opinion in Kay which stated that while bribes in exchange for increased profitability could violate the FCPA, they would not, per se, constitute criminal conduct without an allegation that the increased profits were used to obtain or retain business.”

[…]

“Whether the DOJ’s and SEC’s approach to the business nexus element of the FCPA stems from a misinterpretation of Fifth Circuit’s opinion or an active attempt to challenge Kay remains to be seen. Nevertheless, the lack of clarity ultimately disadvantages defendants who may be pressured to settle charges over conduct which does not necessarily constitute a crime.”

This is not the first time Urofsky, et al have rightly noted the DOJ/SEC’s unhinged enforcement theories relevant to “obtain or retain business.”  (See here for a prior post).

Charles Leeper (DrinkerBiddle) is also deserving of an apple award for his writing on the Layne Christensen enforcement action. He writes:

“According to the Consent Order, between 2005 and 2010 Layne’s subsidiaries made approximately $800,000 in improper payments to foreign officials in various African countries in order to: (1) realize improper tax benefits; (2) secure custom clearance of equipment; (3) avoid assessed customs duties and penalties; and (4) secure work permits for, and avoid deportation of, their employees.  While the SEC alleged that Layne realized financial benefits of approximately $3.9 million by making these payments, the Consent Order does not allege that Layne obtained business from the African governments in question, or even that Layne improved its competitive position in those countries on account of these payments.  Other than a single rote reference to the alleged purpose of “obtain[ing] or retain[ing] business,” the Consent Order contains no indication that the SEC’s investigation produced evidence satisfying the business nexus element of the FCPA.

[…]

Layne’s voluntary disclosure and substantial cooperation likely contributed to the relatively modest penalty that it was assessed by the SEC.  But it is equally likely that the SEC showed uncommon leniency, and the DOJ declined prosecution altogether, because an essential element of the FCPA could not be readily proven.”

Apple awards as well for commentary in this Global Investigations Review article.

“[A] number of lawyers are saying the DoJ failed to file charges as Layne did not satisfy the business-nexus element of the FCPA, which requires violating companies to have paid bribes “to assist the issuer in obtaining or retaining business”. They say the SEC’s decision to bring an administrative proceeding despite the business-nexus element not being met, is part of larger trend in both the SEC and the DoJ to wrongly pursue such cases. Kelly Kramer at Mayer Brown in Washington, DC, agreed that the SEC and DoJ are ignoring the precedent set by Kay. “There is very little court guidance. As a consequence the SEC and DoJ have adopted their own interpretation of the FCPA. Essentially, they presume that bribes that increase corporate profits also help companies to obtain or retain business,” he said. “But that is not always true. The DoJ and SEC seem to be using this presumption to avoid the business-nexus element.” Kramer added that as there are so few appellate FCPA cases, due to the tendency for companies to settle, the SEC and DoJ have created their own “common law of settlement”, which has persuasive value for general counsels, but lacks any legal weight.”

The above commentary should not come as a surprise to frequent readers of FCPA Professor.  The issue of whether the SEC could have actually proved its allegations in the Layne Christensen enforcement action were first flagged in this prior post.

More broadly, I have been writing about the DOJ/SEC’s unhinged “obtain or retain business” theories for years.

See “The Facade of FCPA Enforcement” (an extensive discussion of the Kay case starts at pg. 918 and concludes: Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. These enforcement actions are profiled [elsewhere in the article.] Because none of these actions have been challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny: (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) were too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.”).

See “FCPA Enforcement As Seen Through Wal-Mart’s Potential Exposure” (“[T]he enforcement theory that payments to a foreign official outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny four times. The enforcement agencies lost three of those cases and the fourth case—the Fifth Circuit’s decision in Kay—is equivocal. The decision merely holds that payments to a foreign official outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kay ruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’).

See “Why You Should Be Alarmed by the ADM Enforcement Action” (The Kay court did conclude that payments outside the context of foreign government procurement ‘‘could’’ violate the FCPA, but only if the payments were intended to lower a company’s cost of doing business enough to assist the company in ‘‘obtaining or retaining’’ business. Specifically, the court stated: If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Friday Roundup

By on October 10, 2014 in Apple Award, Compliance, Dyncorp, Enforcement Agency Policy, Enforcement Agency Speeches, Finmeccanica, Foreign Law Enforcement Cooperation, GlaxcoSmithKline, Individual Enforcement Action, Plea Bargaining, Sanofi, SEC, Voluntary Disclosure

A tribute, resource alert, bureaucratic brazenness, scrutiny alerts and updates, a bushel, quotable, and for the reading stack. It’s all here in the Friday roundup.

James McGrath

I join Tom Fox (FCPA Compliance and Ethics Blog) in paying tribute to James McGrath.  Owner of his own Ohio-based firm McGrath & Grace and founder and editor of his own Internal Investigations Blog, McGrath was a bear of a man as Fox wrote.  Yet a gentle and kind bear and I will remember Jim for his desire to learn and engage with students.  He was an occasional contributor to FCPA Professor (see here) and his candid wit resulted in this classic post.  I last communicated with Jim a few weeks ago and he was excited to share some new things in his life and I was happy and excited for him.  Moreover, Jim paid me a visit in Southern Illinois this past spring which is no small feat as one has to make a big of effort to get here.  I enjoyed our visit and discussion.

You will be missed Jim, rest in peace.

Resource Alert

The University of Houston Law Center announced:

“[Release of] a searchable database that contains the compliance codes for Fortune 500 companies.  The project was led by Houston attorney Ryan McConnell, an adjunct professor at the University of Houston Law Center. McConnell worked with a team of recent graduates and current students to develop the database, which covers 42 different topics. “The free database allows any company to conduct benchmarking on virtually every compliance area covered in a code of conduct and to spot compliance trends within their industry,” McConnell explained. “In addition to proactively building a program, when compliance failures occur, whether a foreign bribery violation or environmental issue, stakeholders – whether they are shareholders in a lawsuit or criminal investigators – frequently scrutinize the company’s compliance program.  This database provides a powerful tool for anyone to evaluate the strength of a company’s compliance program, including subject matters addressed in the code and the organization’s core values.”

Bureaucratic Brazenness

This recent Wall Street Journal column “The New Bureaucratic Brazenness” caught my eye.

“We’re all used to a certain amount of doublespeak and bureaucratese in government hearings. That’s as old as forever. But in the past year of listening to testimony from government officials, there is something different about the boredom and indifference with which government testifiers skirt, dodge and withhold the truth. They don’t seem furtive or defensive; they are not in the least afraid. They speak always with a certain carefulness—they are lawyered up—but they have no evident fear of looking evasive. They really don’t care what you think of them. They’re running the show and if you don’t like it, too bad.

[…]

Everything sounds like propaganda. That will happen when government becomes too huge, too present and all-encompassing. Everything almost every level of government says now has the terrible, insincere, lying sound of The Official Line, which no one on the inside, or outside, believes.

[…]

We are locked in some loop where the public figure knows what he must pronounce to achieve his agenda, and the public knows what he must pronounce to achieve his agenda, and we all accept what is being said while at the same time everyone sees right through it. The public figure literally says, “Prepare my talking points,” and the public says, “He’s just reading talking points.” It leaves everyone feeling compromised. Public officials gripe they can’t break through the cynicism. They cause the cynicism.”

I sort of feel this way when I hear DOJ and SEC FCPA enforcement attorneys speak.  Do you?

For instance, last year I attended an event very early in tenure of a high-ranking SEC enforcement official.  This person – who came to the SEC from private practice – candidly stated something to the effect that given his very new position he did not yet know what he was supposed to say.

Scrutiny Alerts and Updates

Sanofi

As recently reported in this Wall Street Journal article:

“Sanofi said it has told U.S. authorities about allegations of improper payments to health-care professionals in the Mideast and East Africa, joining a lineup of pharmaceutical companies that have faced similar claims. Among the allegations are that Sanofi employees made improper payments to doctors in Kenya and other East African nations, handing out perks based on whether the doctors prescribed or planned to prescribe Sanofi drugs, according to the firm and e-mails from a tipster The Wall Street Journal viewed. The French pharmaceutical company said it hired New York law firm Weil Gotshal & Manges LLP to look into the claims and the investigation is continuing. “At this stage, it is too early to draw conclusions,” a company spokesman said. “Sanofi takes these allegations seriously.”

[…]

“The Sanofi investigation began after the firm received a series of anonymous allegations that wrongdoing occurred between 2007 and 2012 in parts of the Middle East and East Africa, the company said. One allegation was that employees of subsidiary Sanofi Kenya bribed medical professionals, a claim made via emails sent to Sanofi senior management last October and in March and viewed by the Journal. Sanofi paid for influential medical professionals to attend conferences, many of which were abroad, and gave them cash and gifts at its own events to win business, the emails allege. Copies of letters the tipster said were sent to Sanofi Kenya by medical professionals, as well as what the emails describe as other Sanofi documents, which were also reviewed by the Journal, indicate that doctors would request money from Sanofi Kenya to attend conferences and events and that Sanofi employees would take into account the applicant’s value to Sanofi’s business before deciding whether to sponsor them or not.”

As highlighted in this August 2013 post, Sanofi’s conduct in China has also been under scrutiny.

GSK

As recently reported in this Reuters article:

“GlaxoSmithKline, which was slapped with a record $489 million fine for corruption in China last month, said on Tuesday it was looking into allegations of corruption in the United Arab Emirates. Britain’s biggest pharmaceuticals group confirmed the investigation following allegations of improper payments set out in a whistleblower’s email sent to its top management on Monday. The email, purporting to be from a GSK sales manager in the Gulf state, was seen by Reuters. The company is already investigating alleged bribery in a number of Middle East countries, including Lebanon, Jordan, Syria and Iraq, as well as Poland. “As we have already said, we are undertaking an investigation into our operations in the Middle East following complaints made previously. This investigation continues and these specific claims were already being investigated as part of this process,” a GSK spokesman said.”

DynCorp

The Washington Times reports here

“State Department investigators uncovered evidence that agents working for one of the largest U.S. military contractors paid tens of thousands of dollars in bribes to Pakistani officials to obtain visas and weapons licenses, but records show the government closed the case without punishing DynCorp.

[…]

But investigators closed the case after deciding they couldn’t prove or disprove the company had the “requisite corrupt” intent required to prove a violation of the Foreign Corrupt Practices Act (FCPA), which bars U.S. companies from bribing foreign officials.

“There was no evidence to support the allegations that DynCorp or its employees had specific knowledge of bribes paid Pakistani government officials,” an investigator wrote in a memo closing out the case last year.

Still, investigators concluded there were violations of the FCPA involving both Speed-Flo and Inter-Risk, both of which are based in Islamabad.”

AgustaWestland / Finmeccanica Related

As noted in this Wall Street Journal article:

“An Italian court found Giuseppe Orsi, the former chief executive of defense firm Finmeccanica, not guilty of international corruption, absolving him of the most serious charge he faced in connection with a 560-million-euro contract won in 2010 to supply the Indian government with 12 helicopters. The three judge panel found Mr. Orsi, 68, guilty of falsifying invoices and sentenced him for that crime to two years in prison, a penalty that was immediately suspended. “A nightmare is over for me and my family,” a visibly relieved Mr. Orsi told reporters after the judge had read the verdict. Italian prosecutors had argued that Mr. Orsi, who at the time of the alleged corruption was CEO of Finmeccanica unit AgustaWestland, directed a plan to pay tens of millions of dollars to Indian officials, including the former top officer in the Indian air force, to win the helicopter-supply competition. Mr. Orsi rose to become CEO of Finmeccanica in 2011 and resigned last year when the corruption charges surfaced. The court also absolved Bruno Spagnolini, who followed Mr. Orsi as CEO of AgustaWestland, of corruption while finding him guilty of falsifying invoices. In reading the verdict, the judge said that while prosecutors had proven that fake invoices had been issued, there was no corruption. Prosecutors had argued there was a direct connection between the false invoices and the payment of kickbacks.”

A Bushel

Matthew Fishbein (Debevoise & Plimpton) was awarded an FCPA Professor Apple Award for this this recent article titled “Why Aren’t Individuals Prosecuted for Conduct Companies Admit.”  Fishbein continues with his spot-on observations in this recent Corporate Crime Reporter Q&A.  For additional reading on the same topics see:

“The Facade of FCPA Enforcement“ (2010)

My 2010 Senate FCPA testimony (“The lack of individual prosecutions in the most high-profile egregious instances of corporate bribery causes one to legitimately wonder whether the conduct was engaged in by ghosts. […]  However, a reason no individuals have been charged in [most FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company … to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable …”.

“But Nobody Was Charged” (2011)

“DOJ Prosecution of Individuals – Are Other Factors At Play?” (2011) (2013) (2014)

“Why You Should Be Alarmed by the ADM Enforcement Action” (2014).

Quotable

In this recent speech, SEC Chair Mary Jo White stated:

“In fiscal year 2013, we brought more than 675 enforcement actions and obtained orders for $3.4 billion in total penalties and disgorgement.  We will soon be announcing the results for our 2014 fiscal year, which ended yesterday.  It was another very productive year as those numbers will show. But numbers only tell part of the story. The quality and breadth of actions are really the more meaningful measure of an effective enforcement program. (emphasis added).”

As to international cooperation, White stated:

“International cooperation is essential to the SEC’s enforcement program, and indeed, to all of our enforcement programs.  In today’s global marketplace, fraudulent schemes and other misconduct commonly have cross-border elements, and the need for seamless cooperation among us has never been greater.

The SEC’s investigations and enforcement actions often involve witnesses and evidence in different countries around the world.  And I know that the same is true in your investigations and enforcement cases.

Faced with this simple reality, if we are to continue to conduct these investigations successfully, and prosecute the offenses and wrongdoers to the fullest extent of our laws, broad and effective use of the MMoU, and our bilateral agreements, is more important than ever.

No one knows that better than the SEC.  Virtually every week, I meet with my fellow Commissioners to decide which cases to bring.  Rarely is there a week when one or more of the cases recommended by the enforcement staff does not involve critical international assistance.  In fact, in the last fiscal year, the SEC made more than 900 requests for international assistance and, as a result, we were able to obtain critical evidence that helped us prosecute wrongdoers for a vast array of serious offenses.

In one recent FCPA case, for example, the SEC obtained valuable evidence — bank and other corporate records — from German prosecutors. [HP] And, we received great support from regulators in Australia, Guernsey, Liechtenstein, Norway, Canada, Switzerland, and the United Kingdom in another major FCPA action. [Alcoa].”

From the Houston Chronicle, a Q&A with former Deputy Attorney General – and current FCPA practitioner – George Terwilliger.

Q: How will enforcement of the Foreign Corrupt Practices Act (FCPA) hinder U.S. energy companies from doing business abroad?

A: Notwithstanding all the good things that are happening with energy upstream production in the United States, the real growth opportunities remain overseas. And a lot of them are in places that are ethically challenged at best in terms of their business and legal cultures. Two things cause problems for companies subject to U.S. law.

One, ambiguities are in the law itself. What is a foreign official? What organizations are covered as entities of foreign governments that are state-owned enterprises three times removed?

Then there’s the uncertainty of the parameters of enforcement policy. Why is this case prosecuted and that one isn’t? Why does this case settle for this much money and that one for that much money? There’s not a lot of transparency, and it’s not apparent to the people who work at this all the time exactly where those parameters are.

Q: Why is that a problem?

A: A company subject to U.S. law that is looking at an opportunity overseas looks at what the profitability model is and then they look at the risk inherent in doing business in that environment. The least little thing that comes up in that process — there’s a piece of real estate they want us to use as a staging area that’s owned by the brother-in-law of the cousin of the oil minister — and they look at it and go, “You know what? We’re not going to do that. It’s not worth the risk.”

Q: Are companies passing up business opportunities because of those risks?

A: Yes, that happens. Companies forgo economic opportunities because the uncertainties are perceived to be too great given the potential return on the investment. The objective of the law is to have a corruption-free level playing field. Most American business people I think believe that given a level playing field they can compete very well, particularly with foreign competitors. The problem is when that playing field is knocked out of kilter by the influence of corruption. Perhaps companies from other countries don’t operate under these constraints, then the playing field isn’t level anymore.

Q: What can mitigate those risks and balance the playing field for U.S. companies abroad?

A: For some time I have advocated some kind of corporate amnesty for companies that investigate themselves, fix their problems and disclose them to the government. If companies become aware of corrupt activity, I think given an incentive to report that they would do it. And that will help the government and help the objectives of this program rather than playing a kind of gotcha game.

Q: Are there any incentives now for companies to disclose potential violations?

A: The Securities Exchange Commission and the Justice Department have articulated policies that whatever the penalty should be for some wrongdoing, it will be less if you self-report, cooperate with an investigation and so forth. I don’t think that’s widely believed in the U.S. corporate community. And it’s almost impossible to measure. I have represented companies where we have made voluntary disclosures that have not been prosecuted. And the government has said the reason they are not prosecuting is because of internal investigation and cooperation. So I’m not saying it doesn’t happen. At the end of the day, companies wrestle with the question of, “Is it really worth it?” All the heartache that’s going to flow from a voluntary disclosure, particularly on something that may be marginal as a violation, is it worth what that’s going to cost? In terms of damage to reputation, shareholder issues, management issues with the board and so forth, is that going to be worth it in terms of what a company might get in terms of some forbearance of penalty?

Reading Stack

“It’s as if the FCPA Super Bowl just ended in a tie.”  (See here from Bracewell & Giuliani attorneys Glen Kopp and Kedar Bhatia regarding the Supreme Court recently declining to hear the “foreign official” challenge in U.S. v. Esquenazi).   

A legitimate concern or a bluff?  (See here from The Globe and Mail – “The head of Canadian engineering giant SNC-Lavalin Group Inc. says any move by authorities to charge the company in connection with an extensive bribery scandal would immediately threaten its future and could force it to close down.”).

An interesting video on Bloomberg’s “Market Matters” regarding the DOJ’s approach to prosecuting alleged corporate crime. The FCPA is not specifically discussed, although the issues discussed are FCPA relevant.

From the Economist “The Kings of the Courtroom:  How Prosecutors Came to Dominate the Criminal-Justice System.” (“The prosecutor has more control over life, liberty and reputation than any other person in America,” said Robert Jackson, the attorney-general, in 1940. As the current attorney-general, Eric Holder, prepares to stand down, American prosecutors are more powerful than ever before. Several legal changes have empowered them. The first is the explosion of plea bargaining, where a suspect agrees to plead guilty to a lesser charge if the more serious charges against him are dropped. Plea bargains were unobtainable in the early years of American justice. But today more than 95% of cases end in such deals and thus are never brought to trial.”).

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A good weekend to all.

And The Apple Goes To …

By on September 22, 2014 in Apple Award, Deferred Prosecution Agreements, FCPA Scholarship, Non-Prosecution Agreement
applepic

Fitting of the season, the FCPA Professor apple award goes to Matthew Fishbein (Debevoise & Plimpton).

In this recent article titled “Why Aren’t Individuals Prosecuted for Conduct Companies Admit,” Fishbein (who previously served in the U.S. Attorney’s Office for the Southern District of New York as Chief Assistant U.S. Attorney and Chief of the Criminal Division, among other DOJ positions), picks an orchard. He writes:

“The public has every right to wonder how it can be that the government brings no charges against individuals in the wake of [corporate criminal settlements]. Companies act only through the conduct of individuals—if the conduct is as egregious as portrayed in these settlements, and if the massive penalties are appropriate, how is it that so often the government charges no individuals?

[…]

Prosecutors’ increasing appreciation of the leverage they enjoy over corporate entities, coupled with companies’ determinations that a “bad” settlement is likely better than a “good” litigation, has resulted in a greater number of corporate settlements in cases where the government would be unlikely to prevail if forced to prove its case in court. The result, increasingly common over the last 20 years, is that prosecutors can obtain what appears to be a monumental victory without needing to develop a theory, supported by evidence, that could survive a legal challenge or prevail before a jury.

Prosecutors have far less leverage over individuals. People, unlike corporations, often face the prospect of incarceration and financial ruin in the event of a criminal conviction. As a result, individuals are more likely to test the government’s legal theories and version of the facts. Of course, the government often does pursue complex cases against individuals where the legal theory is clear and the facts compelling (for example, the recent wave of insider trading cases). But in many of the recent settlements, prosecutors know from their interactions with lawyers for individuals that, unlike with the corporation, they are likely to have a fight on their hands if they bring charges. Prosecutors are under enormous pressure from Congress and the public to pursue cases against senior executives who are thought to have caused the financial crisis. If they thought they would prevail, is there any doubt that they would bring these cases?

[…]

As NPAs and DPAs have become increasingly common, the government’s leverage over corporations in negotiating these settlements has become more apparent. In addition to the tremendous risks associated with an indictment, prosecutors have several other powerful sources of negotiating leverage. These include: government suspension and debarment; the loss of key licenses, such as banking licenses; the drain on the time and energy of corporate executives and other witnesses; legal costs; and costs associated with the uncertainty of a criminal investigation and potential indictment.

Corporations are also reluctant to go to trial because they are risk averse. Regardless of the strength of the government’s case, the facts in corporate criminal cases are often complex or esoteric, and there is always a chance that a jury may not understand why a few problematic documents do not add up to criminal liability.

In light of these factors, companies often may view an admission of criminal conduct as preferable to a legal victory that clears the company’s name but requires years of uncertainty. By entering into a settlement, a company often confines its exposure to a press conference followed by writing a large check, after which the incident may be relegated to a paragraph in a 10-Q filing. By contrast, a company that goes to trial may receive negative—and unpredictable—news coverage for years.

From a business perspective, the preference to settle appears to be prudent: Even though DPAs often involve damaging admissions and massive fines, such negotiated resolutions tend to lead to an immediate increase in a company’s stock price. […] The increase of a company’s stock price after it admits to often egregious criminal conduct and pays a multimillion dollar fine reflects the strong desire of shareholders and the market—and the consequent pressure on corporate executives—to resolve investigations by entering into settlements. The market appears to value the certainty of a resolution more than it is concerned by admissions of criminal conduct.

The above factors all contribute to an environment in which the government can test the limits of its leverage in negotiating corporate settlements. In recent years, prosecutors have pushed those limits further, knowing that they often need not develop a theory of criminal liability that would likely survive a court challenge. A December 2013 NPA that Archer Daniels Midland (ADM) entered into to settle FCPA charges provides a telling example. Under the NPA, ADM agreed to pay $54 million in penalties for bribing foreign government officials. Although it was undisputed that officials of ADM indirect subsidiary ACTI Ukraine paid off foreign officials, they did so in order to receive tax refunds owed by the Ukrainian government.

According to FCPA expert and Southern Illinois University School of Law Professor Michael Koehler, “it is difficult to square [the elements of the FCPA] with the facts alleged in the [ACTI] Ukraine information, and anyone who values the rule of law should be alarmed by it.” The FCPA was designed to prevent companies from “corruptly” acquiring “business”—not receiving owed tax refunds. Moreover, the statute specifically exempts from its anti-bribery provisions “payments to a foreign official…the purpose of which is to expedite or to secure the performance of a routine government action by a foreign official.”

The ADM NPA appears to reflect what Mark Mendelsohn, former head of the Justice Department’s FCPA Unit, has described as the “danger” of NPAs and DPAs: “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” But if a case turns out to be marginal, why would a prosecutor pursue it? My experience as a former prosecutor and current defense lawyer suggests that there are at least three reasons for this phenomenon.

First, competition between prosecutors’ offices and public demands for immediate investigations in the wake of high-profile stories place substantial pressure on prosecutors to investigate companies quickly and to pursue cases without having necessarily vetted their appropriateness for criminal charges.

Second, many of the subjects of corporate investigations are complicated, esoteric, and place a substantial burden on the limited resources of prosecutors’ offices. After a lengthy investigation, a prosecutors’ office may not be inclined to simply close a case, especially if it can induce the company to enter into a settlement.

Third, as a result of the leverage discussed above, prosecutors can obtain settlements and massive payments in even marginal cases. Corporate prosecutions represent a low-risk, high-reward opportunity: The risk inherent in pursuing a marginal case is blunted by the high likelihood that a corporation will settle because of the prosecutor’s superior leverage and the corporate defendant’s rational risk aversion. And as settlements increase and monetary penalties skyrocket, the government accumulates and issues press releases reporting record amounts in fines and forfeitures.

[…]

[F]ew prosecutions of individuals actually occur. The reason is simple: Prosecutors do not possess the same kind of leverage over individuals that they do over companies. Because an admission of wrongdoing by an individual has far greater consequences, individuals are more likely to test the prosecution’s case. In cases where the evidence of criminal conduct is weak, prosecutors may well succeed in inducing the corporation to settle, but fail to convince individuals to do the same. Consequently, we see DPAs, often accompanied by inflammatory statements of fact (drafted by prosecutors) documenting outrageous criminal conduct by the company through its employees, without any follow-up prosecution of individuals.

Prosecutors have long been able to charge companies for the criminal conduct of their employees. And in the appropriate case, it makes sense that the corporation, which is created by the laws of the state, should be held accountable to ensure that its employees follow the law. But it follows that if criminal conduct has occurred, the individuals responsible should also be pursued.

The leverage the government can exercise over companies has tipped the scales to a troubling degree. By using their considerable leverage to induce companies to enter into settlements in increasingly marginal cases and forcing them to admit to egregious conduct to settle charges that likely would not survive a legal challenge or be proved to a jury, prosecutors have created a situation where the public is deceived into thinking that the individuals involved in corporate criminal conduct are receiving a free pass.

If these cases were exposed to the light of day by the adversarial system, the public would learn that they are often far murkier than they appear in the DPA’s statement of facts. Instead, however, the public sees a fundamental disconnect between the prosecution of corporations and the prosecution of individuals—and is justifiably left to wonder why prosecutors do not pursue the individuals through whom all corporations must act.”

For additional reading on the above topics see:

“The Facade of FCPA Enforcement” (2010)

My 2010 Senate FCPA testimony (“The lack of individual prosecutions in the most high-profile egregious instances of corporate bribery causes one to legitimately wonder whether the conduct was engaged in by ghosts. […]  However, a reason no individuals have been charged in [most FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company … to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable …”.

“But Nobody Was Charged” (2011)

“DOJ Prosecution of Individuals – Are Other Factors At Play?” (2011) (2013) (2014)

“Why You Should Be Alarmed by the ADM Enforcement Action” (2014).

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[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Costs of FCPA Investigations – A Board Issue?

By on December 9, 2013 in Apple Award, FCPA Investigative Costs, Guest Posts

Numerous prior posts (see here for instance) have highlighted the excessive pre-enforcement action professional fees and expenses companies often incur when under Foreign Corrupt Practices Act scrutiny.

This month’s FCPA Professor Apple Award (which recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics) goes to Homer Moyer (Miller & Chevalier).

Moyer provides guidance – in a new article titled “Costs of Investigations – a Board Issue?” – on factors that can contribute to the “soaring costs” of FCPA investigations.

Moyer’s article may not be well-received in some circles, but that is all the more reason to read it.  Plus, when a dean of the FCPA bar writes on a pressing topic, you should read.

Moyer’s article was originally published at www.boardmember.com and is republished below with permission.

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Costs of FCPA Investigations–A Board Issue?

Homer Moyer

Even major corporations consider a $10 million FCPA investigation to be a large expenditure. But investigations costing that much or more are no longer aberrational, as public reports and SEC filings in 2013 have made clear.

Companies that are not transnational behemoths – Nordion, Diebold, and Dun & Bradstreet – reported spending $19.5, $22.3, and $18.8 million, respectively, on FCPA investigations. Costs of other investigations, some still ongoing, have been reported to be $75 million (Stryker), $106 million (News Corp), and $130 million (Weatherford). From 2010 through 2012, Avon spent $90-100 million a year; its total costs thus far exceed $345 million.

Walmart, in an investigation begun relatively recently, reportedly has already rung up more than $300 million in costs, with quarterly costs ranging from $44-82 million. So even without reference to the $1 billion total for Siemens’s massive investigation and global remediation, reported costs of FCPA investigations are at levels widely regarded as breathtaking.

Since other large investigations have been expertly and successfully handled at a fraction of those costs, such reports raise the question whether the cost of FCPA investigations should become an issue for companies’ boards of directors. If so, what can board members do to help manage costs while assuring a thorough and rigorous investigation?

One step is to recognize factors, such as the following, that can contribute to soaring costs.

Retaining an Efficient Law Firm.  Although management, not the board, typically hires law firms, board oversight can help avoid common mistakes that lead to excessive costs. With the sharp rise in interest in the FCPA area, it is prudent for companies to press law firms on the extent of their prior FCPA work, the depth of their expertise, the costs of past engagements, and familiarity with the unwritten views of enforcement officials. A firm with limited experience may innocently over-staff, over-investigate, and charge for steep learning curves.

A cost-conscious board member may also appreciate that utilizing multiple regional offices because they are convenient to investigation sites will likely inflate, not reduce, costs. Using lawyers in several locations multiplies the number of lawyers involved. Since a primary driver of costs is the number of timekeepers, a single traveling team will almost always be less costly that multiple teams, most of which have uneven expertise and require additional time for coordination and synthesizing disparate investigation results.

Whether To Retain Forensic Accountants.  Skilled forensic accountants are often indispensable, and failing to retain them can be a grievous error. Where investigating entails “following the money,” experienced, inquisitive forensic accountants can be invaluable.

At the same time, forensic accountants, who often come in teams, are sometimes unnecessary. For example, some payment schemes, once exposed, can readily be understood and remediated without a separate forensics team, or with a small one.

Defining the Scope of the Investigation.  At the outset, the ultimate scope of an investigation may not be known, and successive government requests may expand the scope. Nonetheless, a clear meeting of the minds on staffing and scope, even if for just the first segment of an investigation, can help prevent runaway costs.

Knowing When to Stop.  Closely related is knowing when to stop.  To be credible with government agencies, investigations must be thorough and objective and must test whether abuses are isolated or systemic. Credibility may not require turning over every proverbial rock, however. If an investigation finds consistent patterns of misconduct, it may make more sense to remediate aggressively than to investigate further.

Government enforcement agencies will rarely tell a company to stop or to narrow its investigation. Independent investigations are cost-free benefits for government agencies. Similarly, counsel may sometimes recommend expanding an investigation in the name of satisfying government expectations. A company, however, should want knowledgeable counsel who sees when additional investigation will add little, will so advise their client, and is prepared to make that case to enforcement agencies.

FCPA and due diligence investigations are generally managed by management, not the board of directors. With the reported cost of many FCPA investigations, however, investigation costs may become a board-level issue. When they do, savvy board members who understand potential cost escalators can provide great value to their companies by helping them avoid runaway costs.

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